RBS Completes Britain's First-of-Kind Clean Energy Deal

(Bloomberg) -- Royal Bank of Scotland Group Plc is dipping into the pre-financial-crisis playbook as it seeks to increase funding to the renewable energy sector.

The bank’s NatWest unit structured a 1.1 billion pound ($1.4 billion) synthetic securitization tied to loans for renewable energy projects.

The transaction is the first of its kind in the U.K. to be backed by a portfolio of green loans and will help the bank reach its target of lending 10 billion pounds to the sustainable energy sector before the end of the year, RBS said in a statement. About 85% of the lending is for solar and wind projects, with the rest going to smart meters, energy from waste, hydro power, and biomass power.

Synthetic securitizations, also known as capital-relief trades, have gained popularity among lenders such as Nordea Bank Abp, Standard Chartered Plc and Banco Santander SA in recent years because they help banks meet tougher capital rules without having to find buyers for large portfolios of loans.

They have also raised concerns because of similarities with synthetic collateralized-debt obligations which were blamed for making banks more interconnected and exacerbating the financial crisis.

Read more: Nuveen Sees Structured Finance Going Green With More Solar, Cars

In a synthetic securitization, a bank will buy credit protection on a portfolio of loans from an investor who would then be obliged to reimburse the bank for losses incurred in the portfolio up to a certain amount. By transferring the risk of default to the investor, a bank can reduce the amount of capital it has to hold to cushion against losses.

Macquarie Infrastructure Debt Investment Solutions acted as an adviser for BAE Systems Pension Scheme, which bought the equity tranche of the transaction.

The suite of investable assets that claim to take environmental, social and governance issues into consideration is growing rapidly. Structured credit investors can already buy ESG collateralized loan obligations, and Nuveen to JPMorgan Chase & Co. are forecasting greater supply of ESG securitizations.

Read More: NordLB Offers Renewables Covered Bond on Luxembourg New Law

ESG rating firm Sustainalytics reviewed the projects in the reference portfolio for RBS’ transaction and verified them as green, the bank said. The ESG credential was a “nice to have” for the investor in the transaction but the credit risk of the portfolio was the primary concern, said Benedetto Fiorillo, Head of Portfolio Risk Mitigation at NatWest.

The deal comes at a time when the U.K. government is looking to deploy low-carbon energy infrastructure. For example, in March 2019, the government announced a plan to source 30% of the country’s electricity from offshore wind by 2030, which will need more than 40 billion pounds in investment. It’s one of many announcements expected after the Parliament legally committed the country last year to a goal of hitting net-zero emissions by 2050.

The RBS transaction, known as Nightingale Project Finance 2019-1, priced last month and the bank plans another similar deal in 2021, said Fiorillo

“The rationale to boost deals is certainly driven by not only our capital management but also supporting the banking in a key growth area and ESG is certainly one of those the bank is focused on,” said Fiorillo.

To contact the reporters on this story: Alastair Marsh in London at amarsh25@bloomberg.net;Akshat Rathi in London at arathi39@bloomberg.net

To contact the editors responsible for this story: Tim Quinson at tquinson@bloomberg.net, Chris Vellacott

©2020 Bloomberg L.P.